Macquarie walks away from bid for Stock Exchange

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The Australian investment bank Macquarie surrendered its ambitions to buy the London Stock Exchange yesterday.

After failing to agree a price at which major LSE shareholders would sell, Macquarie said it would not lift its £1.5bn hostile bid or extend its offer past this time next week.

In the three months since the Australians tabled their 580p-a-share offer - dismissed by the LSE and major investors as far too mean - the market value of the exchange has soared by about 50 per cent to new heights.

Business is booming at the LSE, which further sweetened shareholders last week with a promise to double the cash it intends to return to them to £510m on top of an annual share buyback programme worth £50m and a 71 per cent rise in this year's dividend.

LSE shares stood at 829.5p last night, as analysts at the American investment banks Credit Suisse and Citigroup lifted their target prices by as much as 40 per cent to reflect higher expected earnings, greater cost savings and the promised return of capital.

Jim Craig, the head of Macquarie's operations in Europe, said: "We have spent three months talking to LSE shareholders and users and it just did not make sense to pay a price incompatible with our business model. I guess the price has just run away from us."

Macquarie took heavy flak for pitching its offer below the LSE's market price and for characterising the exchange as a strategically isolated, fundamentally low-growth business with slack cost control.

Andrew Mitchell, an exchanges analyst at Fox-Pitt Kelton, said: "They [Macquarie] were never taken seriously. Their original hope was that, because they pitched low, people would lose confidence in another, higher bid coming in and the share-price would drift back. In retrospect, that was the wrong approach."

But Mr Craig maintained that his bank had adopted sensible tactics in its quest to win the exchange, an asset he said remained compatible with other Macquarie infrastructure assets, such as airports and toll roads.

"This actually worked out exactly as we expected it would," Mr Craig said. "We always thought that we could deal with the user groups. We think that the business could fit our model, but at the right price." LSE customers said they had withheld support because Macquarie had failed to soothe concerns fully that it would lift prices should it take over.

Kevin Sloane of Apcims, the trade body for smaller stockbrokers, said: "If Macquarie had come back for another bite of the cherry, we would have wanted copper-bottomed guarantees on prices and services offered."

He applauded the LSE's stalwart defence and expressed a hope that London would be proactive in the global drive towards consolidation among exchanges.

Macquarie's departure, more than a year after the LSE was first approached by Germany's Deutsche Börse, is unlikely to dampen speculation over potential marriages within the sector. The German exchanges group and the Amsterdam-based Euronext were recently given provisional clearance by the Competition Commission to make a move on the LSE but are unlikely to do so. The pair themselves held talks about a potential merger of equals but these stalled.

The LSE has said it sees no major regulatory hurdles blocking a tie-up with either the New York exchange or Nasdaq.

Talks to tie the LSE and OMX of Sweden - thought to be one option favoured by the LSE chief executive Clara Furse - have also taken place.

Less ambitious collaborations limited to specific business areas are possible too.

"All the exchanges are looking at each other and wondering which combination is best," Mr Mitchell said. "In all probability, somewhere along the line, something will happen. But we have been waiting a long time, and may yet wait a good while longer."

History of bids

December 2004 - Deutsche Börse makes a £1.3bn approach to the LSE. Euronext expresses an interest in bidding for the LSE.

March 2005 - Deutsche Börse abandons its offer under pressure from shareholders who think it too generous. Plans for the LSE from Deutsche Börse and Euronext are referred to the Competition Commission.

May 2005 - Werner Seifert, the Deutsche Börse chief executive, resigns after encountering resistance from shareholders who disagreed with his move for the LSE.

August 2005 - Following widespread market speculation Macquarie says it is interested in the LSE.

December 2005 - Macquarie tables a £1.5bn hostile bid.

February 2006 - The Competition Commission gives provisional clearance to Deutsche Börse and Euronext to bid for the LSE. Macquarie walks away after failing to agree a price.